Questions: McKerley Corporation has preferred stock outstanding that will pay an annual dividend of 5.65 per share with the first dividend exactly 15 years from today. If the required return is 3.99 percent, what is the current price of the stock? Multiple Choice 7874 75.72 13617 81.88 14160

Solution Steps

To find the current price of the preferred stock, we need to calculate the present value of the dividend that will be paid in the future. The formula for the present value of a single future payment is:

$$PV = \frac{D}{(1 + r)^n}$$

where:

• $PV$ is the present value (current price of the stock)
• $D$ is the dividend payment (\$5.65)
• $r$ is the required return (3.99% or 0.0399)
• $n$ is the number of years until the dividend is paid (15 years)

We are given the following values:

• Annual dividend $D = 5.65$
• Required return $r = 0.0399$
• Number of years until the dividend is paid $n = 15$

To find the current price of the stock, we use the present value formula for a single future payment:

$$PV = \frac{D}{(1 + r)^n}$$

Substituting the values into the formula:

$$PV = \frac{5.65}{(1 + 0.0399)^{15}}$$

Calculating the denominator:

$$(1 + 0.0399)^{15} \approx 1.6653$$

Now, substituting this back into the present value calculation:

$$PV \approx \frac{5.65}{1.6653} \approx 3.1418$$

Rounding the result to four significant digits, we find:

$$PV \approx 3.142$$

Final Answer